“Credit is expanding very, very slightly from absurdly tight levels” said Laurie Goodman, Ph.D., Director of Housing Policy at the Urban Institute. (see CAR's magazine - Nov/Dec 2015).
The Institute’s Housing Credit Availability Index (HCAI) measures the probability of a loan ever going 90 days delinquent. Based on the Index, the fourth-quarter 2015 default rate was 5.6%. As a comparison, the average default rate for the whole mortgage market in the years 2001 to 2003 was 12.5%, and considered standard.
Lenders are taking much less risks nowadays, and it shows in the current process that buyers have to go through right now in order to get their loan. Underwriters have to show that they have been super careful. As loose criteria lead to abuses - as we have seen too well 6-8 years ago, this is a good thing. But current criteria are too tight for some, who would like to see more "willing and able" buyers have access to home ownership. Indeed the renting alternative can be brutal and in some cases more costly, actually.
"Current criteria" also include the lack of bridge loans, which were so prevalent up until the financial crisis. In my opinion, this is one of the main reasons why the market is currently so tight: most people who would like to move up, or down, do not have the means to qualify for both houses, which is what lenders currently demand. Before the crisis, banks would only ask the buyers to qualify for their new purchase, not both the new purchase and the currently owned home. All they wanted to see was some proof that the currently owned home was going to be sold (i.e. a listing agreement with a Realtor). But this is not the case any more.
The reason why bridge loans are not available is a mystery to me: there is no risk at all for the banks in the Bay Area (and many other appreciating areas, see my last blog on underwater properties), to lend money on a move-up or down purchase. The demand for housing is so strong that the previous home will sell very fast. More houses sold means more loans made by the banks, doesn't it?
These new tight lending rules certainly contribute to the lack of inventory, which also make it harder for buyers to make a purchase. I have several clients would have moved by now if real bridge loans were available.
As is often the case, the pendulum swung too far the other way in my opinion.
Thanks for reading,
Silicon Valley real estate specialist
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A worthy local non-profit to remember: Community Services Agency in Mountain View - our last event there.